Definition
Balance, Principle Of
In real estate appraisal, the Principle of Balance posits that there is an optimal combination of inputs—including labor, capital, and entrepreneurship—that, when integrated with the land, will maximize its value. This principle is used to determine the most effective use of land, ensuring the greatest economic return.
Examples
-
Subdivision Analysis: Suppose a subdivider is determining the optimal size and density of building lots to maximize land value. By analyzing different densities of housing, they discover that 4 lots per acre yield the highest land value.
Land Values at Different Densities (Table 3)
| Lots per Acre |
Price of Lot |
Total per Acre |
| 1 |
$25,000 |
$25,000 |
| 2 |
$18,000 |
$36,000 |
| 3 |
$14,000 |
$42,000 |
| 4 |
$12,000 |
$48,000 |
| 5 |
$9,000 |
$45,000 |
| 6 |
$7,000 |
$42,000 |
Here, the subdivider finds that developing 4 lots per acre provides the highest total value of $48,000 per acre, thus achieving balance.
-
Commercial Development: A developer considering a new shopping center may find that a combination of retail, restaurant, and office spaces achieves the highest land value when compared to developing only one type of structure.
Frequently Asked Questions (FAQs)
What are the main inputs in the Principle of Balance?
The main inputs in the Principle of Balance are labor, capital, and entrepreneurship. These factors contribute to the development and enhancement of land value.
Why is it important to achieve balance in real estate development?
Achieving balance ensures that the land’s highest value is realized, maximizing returns on investment for developers and landowners.
How does the Principle of Balance affect residential versus commercial property?
In residential property, balance may determine optimal lot sizes and densities, whereas, in commercial property, it may involve the mix of retail, office, and other commercial uses to maximize land value.
- Factors of Production: Economic inputs required for the creation of goods or services, traditionally identified as land, labor, capital, and entrepreneurship.
- Highest and Best Use (HBU): The reasonably probable use of property that results in the highest value.
- Real Estate Development: The process of improving land to realize a higher economic value through the construction of residential, commercial, or industrial buildings.
- Appraisal: The professional process of estimating the value of property, typically performed by a licensed appraiser.
Online Resources
References
- Appraisal Institute. (2013). The Appraisal of Real Estate. 14th edition. ISBN: 978-1935328381.
- Betts, Richard M., & Ely, Silas J. (2009). Basic Real Estate Appraisal. 8th edition. ISBN: 978-1111321881.
- Fisher, Jeffrey. (2014). Real Estate Principles. 11th edition. ISBN: 978-1133435063.
Suggested Books for Further Study
-
“The Appraisal of Real Estate” by the Appraisal Institute
Comprehensive textbook on real estate appraisal methodologies and principles.
-
“Real Estate Economics” by Nicholas G. Pirounakis
Overview of economic principles as they relate to real estate markets.
-
“Real Estate Development: Principles and Process” by Mike E. Miles et al.
In-depth look at the real estate development process from inception to realization.
Real Estate Basics: Balance, Principle Of Fundamentals Quiz
### What main inputs are involved in achieving balance according to the Principle of Balance?
- [x] Labor, capital, and entrepreneurship
- [ ] Transport, housing, and education
- [ ] Market, product, and business plan
- [ ] Supply chain, logistics, and infrastructure
> **Explanation:** The Principle of Balance includes labor, capital, and entrepreneurship as the main inputs to maximize land value.
### How does the Principle of Balance determine the optimal land value?
- [ ] By selecting the highest-priced constructed facility
- [x] By combining inputs in a way that maximizes economic returns
- [ ] By following government zoning regulations exclusively
- [ ] By targeting high-density urban areas
> **Explanation:** The Principle of Balance involves combining inputs, like labor and capital, such that the land achieves the highest possible economic return.
### In the given example, what density yields the highest total land value?
- [ ] 1 lot per acre
- [ ] 2 lots per acre
- [x] 4 lots per acre
- [ ] 6 lots per acre
> **Explanation:** The optimal density that yields the highest total land value in the example is 4 lots per acre at $48,000.
### Why is balance significant in real estate development?
- [ ] It ensures compliance with all zoning laws.
- [ ] It makes the construction process easier.
- [x] It results in the highest possible land value.
- [ ] It promotes environmental sustainability.
> **Explanation:** Balance is significant because it ensures the highest possible land value, maximizing returns for developers and landowners.
### Can the Principle of Balance be applied to development types other than residential?
- [x] Yes, it applies to both residential and commercial properties.
- [ ] No, it only applies to residential properties.
- [ ] Only to high-rise buildings.
- [ ] Exclusively to agricultural development.
> **Explanation:** The Principle of Balance applies to both residential and commercial properties, determining the optimal input mix to maximize land value.
### In the example table, what is the total value per acre for 3 lots per acre?
- [x] $42,000
- [ ] $36,000
- [ ] $25,000
- [ ] $48,000
> **Explanation:** The total value per acre for 3 lots per acre in the example table is $42,000.
### What is an example of an input when applying the Principle of Balance?
- [ ] Legal framework
- [x] Capital
- [ ] Agricultural policy
- [ ] Road infrastructure
> **Explanation:** An input in the context of the Principle of Balance is capital, alongside other factors like labor and entrepreneurship.
### How do factors of production relate to the Principle of Balance?
- [ ] They override zoning regulations.
- [ ] They devalue the property both residential and commercially.
- [x] They are the inputs used to optimize land value.
- [ ] They only apply to industrial use cases.
> **Explanation:** Factors of production, such as labor, capital, and entrepreneurship, are inputs used to achieve balance and optimize land value according to the Principle of Balance.
### What is the ultimate goal when applying the Principle of Balance?
- [ ] To create the largest structures possible.
- [ ] To avoid tax liabilities.
- [x] To achieve the greatest land value.
- [ ] To maximize population density.
> **Explanation:** The ultimate goal of applying the Principle of Balance is to achieve the greatest land value through an optimal mix of inputs.
### What would be a factor limiting the effective application of the Principle of Balance?
- [ ] Availability of natural resources
- [x] Regulatory and zoning restrictions
- [ ] The principle only applies to commercial property.
- [ ] A limited number of inputs and outputs
> **Explanation:** Regulatory and zoning restrictions can limit the effective application of the Principle of Balance as they may constrain the developer’s ability to use the optimal mix of inputs.
